Perfect Competition Flashcards
Assumptions of perfect competition
Sellers are price takers
Buyers are price takers
Free entry in the long run
Assumptions of perf comp more likely to hold if?o
- there are many small buyers n sellers
- firms produce homogenous products
- consumers have full info
- negligible transaction costs
- no barriers to entry or exit
Draw a. Derived demand curve
Welfare is what?
Welfare = consumer surplus + prod surplus
What are 2 commonly used forms of market intervention?
Taxes & price controls
What are two types of taxes?
AD valoren tax; tax is a % of the value of the good being taxed e.g VAT
Specific tax: tax is a specified amount collected per unit of output (e.g taxes on alcohol and tobacco)
What is the difference between statutory and economic incidence of tax?
Statutory: who is legally responsible for paying the tax?
Economic: what is the actual change in real income & welfare brought about by the tax?
What does the economic incidence of tax depend on?
Price elasticity of demand + supply
If supply more elastic, consumers bear more of tax burden
If demand more elastic, producers bear more of the tax burden
What are the two price controls
Price ceiling & price floor
Price ceiling limits the amount that can be charged for a good (rent control, energy price cap)
Price floor limits how low the price can get (price support for agricultural goods)
Draw me a price ceiling and floor
What does the perfect competition model allow us to predict
How demand and supply curves shift following changes to price. Income and tech
Perfectly competitive markets maximise…
Economic welfare (surpluses)
